Which it is, btw, the 14th Amendment and all that, although some fools think that Treasury can prioritize and just pay interest on the debt while not paying all sorts of other legally mandated bills. As it is, it is against the law not to pay legally mandated bills, although those who want to blow past the debt ceiling say that all that would be involved would be delaying paying the bills. But the effect would be very bad for the US and world economy, as leaders from all over the world are telling us about as loudly as they can, not that those who are pushing for a default are paying the slightest shred of attention to them.
Quite aside from the fact that the debt ceiling is unconstitutional, even if, Mr. President, you are reported to accept the argument of Laurence Tribe that it is constitutional, you yourself have analyzed how given the current polarization, it just sets you and your successors up for repeated blackmail. You already caved in 2011 and are now trying to put the genie back into the bottle. It looks like it is not going, with Vix soaring and Congress just apparently unable to cut any sort of deal. Maybe, just maybe, Boehner will simply pass some six weeks extension at the last minute, but that simply puts the day of reckoning off six weeks. It is time to end this once and for all, even though you will probably be impeached by the loonies in the House. Rest assured that you will not be convicted by the Senate, and the world and history will be grateful, even if SCOTUS later stupidly disagrees with the judgment and reinstates the damned thing. Hopefully they will not, and the US and world economies and future presidents will be freed from this noxious law that never should have been passed and is the only one of its kind ever passed in any nation on the planet.
Let us recognize that in fact we really do not know what will happen if there is a default. It may well be the case that those saying consequences will not be all that bad may prove to be right. Interest rates will go up in the US with a slowdown in US growth, but adjustments will be made and the world will not come to an end. OTOH, there is a really serious downside tail risk here, one that those who are more closely connected with the financial markets seem to take very seriously. One of the worst possible scenarios would be a complete freezeup of the repo bond market. The reason would be that what gets traded there are essentially short term Treasury securities, whose interest rates are currently soaring. This is the main market the Fed uses for its open market operations, and it is arguably at the very foundation of the entire global financial system. Causing it to freeze up completely by defaulting on the main security being traded in it might well lead to the Fed to being totally crippled in dealing with this crisis and essentially freezing up nearly every financial market in the world in a scenario that not only would make 2008 look like a picnic on Sesame Street, but could rival even 1931 as well. Yes, this is a less than 50% probability outcome, but, Mr. President, do you really want to risk this? Please act to forestall such an utterly disastrous possibility.
Barkley Rosser
Tuesday, October 15, 2013
Monday, October 14, 2013
Fair and Balnced in Sweden
One guy gets a Nobel for showing that asset markets are efficient. Another gets one for showing that they are nothing of the sort! Go figure.
Sunday, October 13, 2013
Greg Mankiw’s Misguided Example of the Lack of Political Comity
Greg Mankiw pens an admirable call for both parties to work together. Alas his example strikes me as one that completely ignores the history of the health care debate:
the vote on President Obama’s 2010 health care reform was entirely one-sided, so it is no surprise that the law is still the source of much rancorAs long as this op-ed was, could Mankiw have noted that Obama decided not to go for the progressive’s preferred approach – universal health care? Obama instead put forth a plan that John Gruber designed, which was the same plan that Governor Romney adopted in Massachuetts. In other words, he reached out to the other side and adopted what used to be the Republican alternative to universal health care. He also was willing to work with Republicans but these same Republicans acted just like the Eagles and the Rattlers in his summer camp parable. While calls for comity are admirable, we need to start the process with at least a shred of honesty.
Thursday, October 10, 2013
Paul Ryan Echoes Niall Ferguson
Paul Ryan to the rescue in terms of the government shut down?! I’ll leave it to others to make the political point – he is throwing the anti-Obamacare Tea Party agenda under the bus in favor of the good old fashion Romney more tax cuts for the rich. After all, the first two paragraphs of his latest rant is wasted on blaming the President for not negotiating. But should we not have seen this coming given the latest nonsense from Niall Ferguson? Consider Ryan’s dire warning:
The Federal Reserve won't keep interest rates low forever. The demographic crunch will only get worse. So once interest rates rise, borrowing costs will spike. If we miss this moment, the debt will spiral out of control.OK – Ryan did not get into the numbers over whether interest expenses are 8% of GDP or 8% of tax revenues. But Ryan and Ferguson are on the same page as to how to lower future deficits:
the discretionary spending levels in the Budget Control Act are a major concern. And the truth is, there's a better way to cut spending. We could provide relief from the discretionary spending levels in the Budget Control Act in exchange for structural reforms to entitlement programs. These reforms are vital. Over the next 10 years, the Congressional Budget Office predicts discretionary spending—that is, everything except entitlement programs and debt payments—will grow by $202 billion, or roughly 17%. Meanwhile, mandatory spending—which mostly consists of funding for Medicare, Medicaid and Social Security—will grow by $1.6 trillion, or roughly 79%. The 2011 Budget Control Act largely ignored entitlement spending. But that is the nation's biggest challenge.Gee whiz – Social Security cuts and scaling back Federal spending on health care, which was the fiscal part of the Romney-Ryan 2012 campaign. How well did that campaign work out? And why do we need to cut entitlements? Ryan repeats his desire for even lower tax rates than we got by making the Bush tax cuts permanent. Finally, Ryan like Ferguson must have missed what the latest from the CBO said why their forecast of the future debt path deteriorated:
Federal revenues under the extended baseline are now expected to be substantially lower in coming decades than CBO projected in 2012 (see the top panel of Figure A-2). By 2023, revenues are projected to be 2.8 percent of GDP lower than projected in the 2012 analysis: 18.5 percent of GDP rather than 21.3 percent ... Noninterest spending under the extended baseline is now expected to be lower in coming decades than CBO projected in 2012 (see the middle panel of Figure A-2). Specifically, noninterest spending in 2038 is projected to be 1.4 percent of GDP lower than in the 2012 analysis.Even though Romney-Ryan lost the election in 2012, they have won in terms of getting spending cuts to pay for making the Bush tax cuts permanent. But they want even more spending and tax cuts and are mad that President Obama is not capitulating again.
Tuesday, October 8, 2013
Thank You Mr. President And All The Best To Janet Yellen
President Obama has finally seen the light and agreed to nominate Janet L. Yellen as Fed Chair. Sen. Corker of TN is against her, but otherwise it looks like she has overwhelming support in the Senate and will be confirmed quite easily. Futures on stock markets are up despite falling sharply today as it increasingly looks like not only might the shutdown get fail to get solved soon, but there might actually be a default by the US government. Although Obama is reportedly saying that this decision had nothing to do with the current budget crisis, word of it has sent futures on the stock market upwards, although that will probably get quickly reversed if there continues to be no resolution. In any case, it takes one element of uncertainty off the table in a period of sharply rising uncertainty, with the VIX having risen over 50% since Sept. 20.
As it is, that old Chinese curse holds, "May you live in interesting times." It may well be that if there is a failure to raise the debt ceiling or otherwise get around it with a major financial crisis ensuing, it will hit while Bernanke is still officially in charge. But clearly Yellen will be faced with having to deal with the cleanup of the mess that will ensue. While one can poke at this or that aspect of her views, there is no doubt that she is as qualified and capable as any potential Fed Chair to handle these potential upcoming "interesting times" as anybody else out there, with her excellent track record of forecasting as documented by the Wall Street Journal encouraging in this respect. In any case, whatever anybody thinks of her, we all should wish her the very best in dealing with these "interesting times," which threaten to get just all too interesting in the near future.
BTW, I cannot resist reminding one and all for the record that I was the first person on the planet to publicly call for her to be appointed as Fed Chair, and I did it all the way back in July, 2009 right here on Econospeak. So I am pleased to pat myself on the back publicly in seeing my long ago request finally being fulfilled. Of course, I must applaud it, :-).
Barkley Rosser
As it is, that old Chinese curse holds, "May you live in interesting times." It may well be that if there is a failure to raise the debt ceiling or otherwise get around it with a major financial crisis ensuing, it will hit while Bernanke is still officially in charge. But clearly Yellen will be faced with having to deal with the cleanup of the mess that will ensue. While one can poke at this or that aspect of her views, there is no doubt that she is as qualified and capable as any potential Fed Chair to handle these potential upcoming "interesting times" as anybody else out there, with her excellent track record of forecasting as documented by the Wall Street Journal encouraging in this respect. In any case, whatever anybody thinks of her, we all should wish her the very best in dealing with these "interesting times," which threaten to get just all too interesting in the near future.
BTW, I cannot resist reminding one and all for the record that I was the first person on the planet to publicly call for her to be appointed as Fed Chair, and I did it all the way back in July, 2009 right here on Econospeak. So I am pleased to pat myself on the back publicly in seeing my long ago request finally being fulfilled. Of course, I must applaud it, :-).
Barkley Rosser
A Small Addendum to Mike Konczal’s Take Down on Conservative “Experts” on the Debt Ceiling
Mike notes this political spin:
Right now, many House Tea Party members believe that a default is impossible because we can prioritize interest payments to go first.He provides some very good discussions on the likely impact of default but also notes that the Usual Suspects – Dan Mitchell of Cato, the Heritage Foundation, and the American Enterprise Institute – were happy to parrot this political spin. But seriously – does anyone take these guys seriously? Which I am obligated to provide this from Greg Mankiw:
My Harvard colleague Martin Feldstein writes me in an email: The WSJ and FT continue to write about the risk of default, quoting the Treasury, Boehner and others. There really is no need for a default on the debt even if the debt ceiling is not raised later this month. The US government collects enough in taxes each month to finance the interest on the debt, etc. The government may not be able to separate all accounts into "pay" and "no pay" groups but it can certainly identify the interest payments. An inability to borrow would have serious economic consequences if it lasted for any sustained period but it would not have to threaten our credit standing.Whatever! OK – on a more serious note, Menzie Chinn takes a look at what happened to the S&P 500 index “when we last came close to a breach, but the Government didn't actually default”.
Monday, October 7, 2013
CBO’s Projections of Spending Did Not Rise as Suggested by Niall Ferguson
Niall Ferguson writes in the Wall Street Journal:
An entitlement-driven disaster looms for America ... True, the federal deficit has fallen to about 4% of GDP this year from its 10% peak in 2009. The bad news is that, even as discretionary expenditure has been slashed, spending on entitlements has continued to rise—and will rise inexorably in the coming years, driving the deficit back up above 6% by 2038. A very striking feature of the latest CBO report is how much worse it is than last year's. A year ago, the CBO's extended baseline series for the federal debt in public hands projected a figure of 52% of GDP by 2038. That figure has very nearly doubled to 100%. A year ago the debt was supposed to glide down to zero by the 2070s. This year's long-run projection for 2076 is above 200%.The reader is likely left with the impression that this change in the projected debt path was driven by an increase in expected future spending. Brad DeLong:
A year ago, the CBO was required by law to calculate its extended baseline by assuming that all of the tax cuts originally put in place in 2001 and 2003 would expire at the end of 2012, and never be reinstated.In other words, much of the blame for the worsening projection had to do with the decision to make the Bush tax cuts permanent. But could it be the case that some of the blame is due to a rise in the expected path of Federal spending? If anyone actually bothered to read the CBO report that Mr. Ferguson referenced, the answer would clearly be no. Figure A.2 of The 2013 Long-term Budget Outlook is entitled “Comparison of CBO’s 2012 and 2013 Budget Projections Under the Extended Baseline”. Check the graphs out for yourself or simply read what the CBO says:
Federal revenues under the extended baseline are now expected to be substantially lower in coming decades than CBO projected in 2012 (see the top panel of Figure A-2). By 2023, revenues are projected to be 2.8 percent of GDP lower than projected in the 2012 analysis: 18.5 percent of GDP rather than 21.3 percent ... Noninterest spending under the extended baseline is now expected to be lower in coming decades than CBO projected in 2012 (see the middle panel of Figure A-2). Specifically, noninterest spending in 2038 is projected to be 1.4 percent of GDP lower than in the 2012 analysis.In other words, the document that Mr. Ferguson references says precisely the opposite about spending from what he is trying to claim in his Wall Street Journal oped. Did he really read the entire thing? If so – he could not have missed this central point.
Reification
Chris Dillow writes:
He goes on to argue that we shouldn't worry about alienation/reification because a) workers may well enjoy alienated labor and b) there's nothing the government can do about it short of replacing the market with central planning, which doesn't work.
My take on alienation is somewhat different. I think that something like reification appears in the context of coordination games. Here's a simple one. We each decide separately and independently whether or not to walk downtown at night. Suppose it's the case that when enough people walk the street, downtown is safe; otherwise it's dangerous . So we get 2 equilibria: We all walk, the streets are safe, so we all walk; or no one walks, the streets are dangerous, so no one walks. Let's say we're in the latter equilibrium: we have reification if each of us thinks that the reason he/she doesn't walk is that the streets are dangerous. In fact, the reverse is true: collectively, the streets are dangerous because we don't use them. This seems to capture the idea that without explicit coordination, we fail to see our own authorship of social reality. Notice too that the problem still exists in the better equilibrium. Here we get the efficient equilibrium, but to the extent that we see the safety of the streets as a fact to which we respond by walking out at night, we have reification.
Here's another example: Each employer decides not to hire because there is insufficient demand, while in fact there is insufficient demand because collectively employers are not hiring. Or: we run the bank because we believe it will fail when in fact the bank will fail becuse we are running it.
Is reification in this sense a problem? Well with explicit coordination, we would avoid the bad equilibrium. And the situation could be fixed without coercion and without any sort of Hayekian knowledge problem to contend with. Suppose though that we are in the better equilibrium and yet we have reification in this sense: I think Marx would say it is a problem: people are confused about their own agency and thus in some sense unfree. I
This might be one rational(or irrational) reconstruction too much, I realize!
"In the day job, I point out that the "Mr Market" metaphor can be be misleading. If markets are complex emergent processes, as Alan Kirman shows, prices and quantities cannot be seen as the result simply of an individual's behaviour writ large, and markets are unpredictable.
Such a conception is consistent with Marxian concepts of alienation and reification. In capitalism, said Marx, "the productive forces appear as a world for themselves, quite independent of and divorced from the individuals." Or as Lukacs put it:
A relation between people takes on the character of a thing and thus acquires a ‘phantom objectivity’, an autonomy that seems so strictly rational and all-embracing as to conceal every trace of its fundamental nature: the relation between people." "
He goes on to argue that we shouldn't worry about alienation/reification because a) workers may well enjoy alienated labor and b) there's nothing the government can do about it short of replacing the market with central planning, which doesn't work.
My take on alienation is somewhat different. I think that something like reification appears in the context of coordination games. Here's a simple one. We each decide separately and independently whether or not to walk downtown at night. Suppose it's the case that when enough people walk the street, downtown is safe; otherwise it's dangerous . So we get 2 equilibria: We all walk, the streets are safe, so we all walk; or no one walks, the streets are dangerous, so no one walks. Let's say we're in the latter equilibrium: we have reification if each of us thinks that the reason he/she doesn't walk is that the streets are dangerous. In fact, the reverse is true: collectively, the streets are dangerous because we don't use them. This seems to capture the idea that without explicit coordination, we fail to see our own authorship of social reality. Notice too that the problem still exists in the better equilibrium. Here we get the efficient equilibrium, but to the extent that we see the safety of the streets as a fact to which we respond by walking out at night, we have reification.
Here's another example: Each employer decides not to hire because there is insufficient demand, while in fact there is insufficient demand because collectively employers are not hiring. Or: we run the bank because we believe it will fail when in fact the bank will fail becuse we are running it.
Is reification in this sense a problem? Well with explicit coordination, we would avoid the bad equilibrium. And the situation could be fixed without coercion and without any sort of Hayekian knowledge problem to contend with. Suppose though that we are in the better equilibrium and yet we have reification in this sense: I think Marx would say it is a problem: people are confused about their own agency and thus in some sense unfree. I
This might be one rational(or irrational) reconstruction too much, I realize!
Friday, October 4, 2013
NBER Recessions vs. Actual Recessions? (part 2 of 2)
(continued from part 1)
Employment Recessions. The end of the discussion of part 1 of this blog post suggests another way that the econopundits and people differ. Our commentators usually only care about the flow of money through the market economy (corrected for the impact of inflation, of course). In terms of the analogy, they care about the health of the "tiger." That’s what’s measured by GDP: nonmarket goods and service and nonmarket costs are not counted as part of GDP (with one minor exception). One reason why the econopundits have this focus is that they care a lot about stock prices (perhaps because they own stock), while the stock market’s speculative ups and downs are encouraged by GDP fluctuations. They are also more likely to be served well by the market than are people who are living from paycheck to paycheck.
But for most people, there’s a more important issue than GDP: to quote an old labor leader, for most people what’s counts is “jobs, jobs, jobs.” That is, though money flowing through the economy helps create jobs, what’s crucial is the general availability of job vacancies. We must ask: is the flow of money fast enough to lower the unemployment rate, to make the labor-market situation better for the vast majority? Or with a recession, is the flow of money so slow that the availability of jobs sags and unemployment soars? (That is, what about the health of the people who are clinging to the tiger's back?)
It’s this conflict of perspectives that’s behind the seemingly oxymoronic phrase “jobless recovery.” In this situation, the “economy” is recovering in the sense that real GDP is rising (with more money flowing) but jobs aren’t being created quickly enough to provide employment to new job-seekers and those who have lost their jobs. Thus, despite rising GDP, unemployment rates rise!
This contradiction – and the possibility of a jobless recovery – arises because of what economists call “Okun’s Law,” named after the late economist Arthur Okun. It’s really just a rule of thumb based on studying the real world, not a law. A law is a regularity which always works the same way, such the law of gravity in physics. There are no laws like that in economics. Thus, Okun's rule of thumb says that the slow growth of the U.S. economy since the 2009 should imply rising official unemployment rates (U3), but exactly the opposite has happened.
However despite this seeming contradiction, Okun's law captures the nature of a real problem. This idea goes beyond the common-sense idea that producing more real GDP means that more jobs are available, so that unemployment rates fall. It says that in order to prevent unemployment rates from rising the year-to-year growth rate of real GDP must exceed approximately 3 percent per year.
Why is it that real GDP must grow faster than 3 percent per year to get unemployment rates to fall? Partly it’s because new workers keep entering (or reentering) the labor force, seeking jobs and adding to the potential pool of unemployed workers. In addition, the normal growth of workers’ productivity – their ability to produce output during an hour of paid work – means that if the demand for products doesn’t rise fast enough, bosses may find some or even all of their existing employees to be “redundant” and so lay them off.
That is, if the economy – as measured by flows of money through markets – is growing at 4 or 5% per year (or even 3.5% per year), unemployment rates fall significantly and in a sustained way. This kind of true recovery is exactly what the doctor ordered for the current U.S. economy, since unemployment rates are so high. (It’s true that inflation may result from a true recovery, but that doesn’t make it any less of a recovery. Rather, it tells us that the tiger can eat too much.)
On the other hand (if Harry Truman hasn’t sawed off the economist’s other arm yet), if the economy is growing at only 1 or 2% per year, unemployment rates rise. That situation might be a jobless recovery. But there’s a second possibility: it might be a case of that mysterious creature called a growth recession. In this case, real GDP slows its growth without actually falling (a negative growth rate), so that unemployment rates rise.
There’s a third situation where we see rising unemployment despite growing real GDP. This occurs before an NBER recession occurs: if real GDP growth slows (causing rising unemployment as collateral damage), it can lead businesses to start retrenching and cut their new fixed investment spending. This in turn can lead to an NBER recession (an actual sustained fall of real GDP) to follow. This might be called a prelude employment recession (though it would be helpful if someone could suggest a better name).
Major causes of prelude recessions include a private-sector slowdown (as in classic stories of business cycle) and efforts by the Federal Reserve or other policymakers to attain a “soft landing.” (This refers to an effort to engineer a gradual reduction of real GDP growth and slow the fall of unemployment rates (or even raised them) in order to keep inflation from getting worse.)
A prelude recession might also happen due to the government’s budget sequester and the current partisan-driven “shutdown.” Both reduce government spending and hiring, which can reverberate through the economy causing the real GDP growth to slow. This process might snowball as both consumers and businesses cut spending, again reducing the availability of jobs and income. Thus an NBER recession can result. It's also possible that all we're going to have is a growth recession, but that's not what the doctor ordered when we still haven't recovered from the Great Recession.
The Measures. With these three kinds of non-NBER recessions in mind, I measured a “recession” as involving two or more back-to-back quarters of rising unemployment rates. These may be called “employment recessions” since employment recedes as unemployment rises. I use the unemployment rate, since talking about thousands or millions of unemployed workers misses the fact that the labor force (those both willing and able to work for pay) steadily increases over time. I use quarters (rather than months or years) in order to parallel the journalist’s version of the NBER definition of a recession. Just as with an NBER downturn or a Household Income Recession, I omit the period of stagnation that occurs in the aftermath of a recession. However, note that Household Income Recessions typically last longer than Employment Recessions.
The Bureau of Labor Statistics produces several other measures of “labor market slack,” but here I’m going to use what econopundits think of as the “official” unemployment rate (U3). This is partly due to the fact that the BLS didn’t start reporting other measures until relatively recently. It’s also the number that receives the most attention in the press even though it leaves out problems such as involuntary part-time workers, people who are driven out of job-seeking by bad prospects, and long-term unemployment. I doubt that using other measures will change my results, but we shall see. (Being fundamentally lazy, I’ll let someone else do this work.)
In any event, I doubt that there is a “correct” gauge of the starts and stops of recessions. If anything, I’d prefer the Household Income Recession measure of my previous blog. But it’s time to get to the results. But the point is not to present a total alternative to the NBER’s recession as much as to look at the economy from a different perspective.
I used quarterly data from 1948 to the present as provided by the BLS and massaged by the Federal Reserve Bank of St. Louis, to get quarterly numbers. I also got the NBER dates from the St. Louis Fed. First, we see three recessions that the NBER missed completely. They are growth recessions, since unemployment rose due to slowing real GDP growth without a full-scale GDP downturn happening. They occurred in 1951, 1959, and 1976. By sheer coincidence each of these occurred in the third and fourth quarters of the year (and yes the number were seasonally adjusted). Only the middle one (1959) really deserves serious attention, however, since the increases in the unemployment rate during the other two growth recessions were minor (i.e., one tenth of a percentage point). Of course, these growth-rate dips are “minor” only from an economist’s perspective. For those people in involved, the situation could easily been dire, since so many of us have a hard time doing well unless the economy is truly booming.
Next, we see the infamous jobless recoveries. They appear in the table below, using both my dates and those of the NBER, where “q” refers to the quarter of a year. Ignoring the growth recessions, all of the recessions I found except the second Volcker recession (1981q4-1982q4) ended after the trough quarter of the corresponding NBER recession. For Volcker #2, it’s cold comfort that unemployment stopped rising, since that one attained the highest unemployment rate the U.S. had seen since the Great Depression of the 1930s. Anyway, here’s my list, with the ways in which the two measures differ highlighted in boldface. The list includes the second Volcker recession as #8.
On the other hand, all of the employment recessions ended a quarter or more after the NBER recession ended. That is, the jobs situation (as measured by the official unemployment rate) continued to get worse even though the speed of the money flow through markets started rising. This joblessness was significantly worse during the 1990q3-1992q2 recession (#9), which ended fully five quarters after the NBER declared the recession over. It was this event which gave birth to the phrase “jobless recovery” while also helping to push President Bush #1 out of office (to be replaced by Clinton #1).
The lack of job creation after the NBER recovery began got worse, with recessions #10 and #11. The allegedly “mild” recession of 2001 (which I date as continuing all the way to 2002q2) ended two quarters after the NBER date. The same applies to the 2007q3-2009q4 “Great” one. Jobless recoveries seem to becoming the rule rather than the exception.
What about those prelude recessions? The first Volcker recession (#7) started two quarters earlier than in the NBER’s log. That is, the recession was much worse for working people than would be indicated by only looking at fluctuations of real GDP or NBER dates. The 2001 employment recession (#10) started one quarter “early” (compared to the NBER measure). I don’t know why this happened. Suffice it to say that the “Clinton boom” wasn’t as good as advertised.
Finally, the Great Recession (#11), which I date as being from 2007Q3 to the end of 2009, began one quarter earlier than the NBER measure. The fading job market was actually noted by the NBER committee that determines dates for business-cycle peaks and troughs, so that they stressed employment numbers much more than the usual real GDP measure in their dating. (They also dated the peak before the storm as during late 2007, but that’s lost when you use quarterly data.)
Conclusion. It's hard to draw a simple conclusion from these data. But two general conclusions are obvious. First, we shouldn't take NBER recessions as somehow reflecting the "gospel truth." The popular view that the "recession isn't over" actually says more than the NBER studies. Second, how we measure a peak month or quarter that begins a "recession" and the trough month or quarter that ends it depends on what our purposes are. The use of an unemployment measure, for example, illuminates the phenomenon of a "growth recession" (and similar) and the conflict between what's good for the market economy (measured by GDP) and what's good for working people (measured by employment rates).
– Jim Devine
Employment Recessions. The end of the discussion of part 1 of this blog post suggests another way that the econopundits and people differ. Our commentators usually only care about the flow of money through the market economy (corrected for the impact of inflation, of course). In terms of the analogy, they care about the health of the "tiger." That’s what’s measured by GDP: nonmarket goods and service and nonmarket costs are not counted as part of GDP (with one minor exception). One reason why the econopundits have this focus is that they care a lot about stock prices (perhaps because they own stock), while the stock market’s speculative ups and downs are encouraged by GDP fluctuations. They are also more likely to be served well by the market than are people who are living from paycheck to paycheck.
But for most people, there’s a more important issue than GDP: to quote an old labor leader, for most people what’s counts is “jobs, jobs, jobs.” That is, though money flowing through the economy helps create jobs, what’s crucial is the general availability of job vacancies. We must ask: is the flow of money fast enough to lower the unemployment rate, to make the labor-market situation better for the vast majority? Or with a recession, is the flow of money so slow that the availability of jobs sags and unemployment soars? (That is, what about the health of the people who are clinging to the tiger's back?)
It’s this conflict of perspectives that’s behind the seemingly oxymoronic phrase “jobless recovery.” In this situation, the “economy” is recovering in the sense that real GDP is rising (with more money flowing) but jobs aren’t being created quickly enough to provide employment to new job-seekers and those who have lost their jobs. Thus, despite rising GDP, unemployment rates rise!
This contradiction – and the possibility of a jobless recovery – arises because of what economists call “Okun’s Law,” named after the late economist Arthur Okun. It’s really just a rule of thumb based on studying the real world, not a law. A law is a regularity which always works the same way, such the law of gravity in physics. There are no laws like that in economics. Thus, Okun's rule of thumb says that the slow growth of the U.S. economy since the 2009 should imply rising official unemployment rates (U3), but exactly the opposite has happened.
However despite this seeming contradiction, Okun's law captures the nature of a real problem. This idea goes beyond the common-sense idea that producing more real GDP means that more jobs are available, so that unemployment rates fall. It says that in order to prevent unemployment rates from rising the year-to-year growth rate of real GDP must exceed approximately 3 percent per year.
Why is it that real GDP must grow faster than 3 percent per year to get unemployment rates to fall? Partly it’s because new workers keep entering (or reentering) the labor force, seeking jobs and adding to the potential pool of unemployed workers. In addition, the normal growth of workers’ productivity – their ability to produce output during an hour of paid work – means that if the demand for products doesn’t rise fast enough, bosses may find some or even all of their existing employees to be “redundant” and so lay them off.
That is, if the economy – as measured by flows of money through markets – is growing at 4 or 5% per year (or even 3.5% per year), unemployment rates fall significantly and in a sustained way. This kind of true recovery is exactly what the doctor ordered for the current U.S. economy, since unemployment rates are so high. (It’s true that inflation may result from a true recovery, but that doesn’t make it any less of a recovery. Rather, it tells us that the tiger can eat too much.)
On the other hand (if Harry Truman hasn’t sawed off the economist’s other arm yet), if the economy is growing at only 1 or 2% per year, unemployment rates rise. That situation might be a jobless recovery. But there’s a second possibility: it might be a case of that mysterious creature called a growth recession. In this case, real GDP slows its growth without actually falling (a negative growth rate), so that unemployment rates rise.
There’s a third situation where we see rising unemployment despite growing real GDP. This occurs before an NBER recession occurs: if real GDP growth slows (causing rising unemployment as collateral damage), it can lead businesses to start retrenching and cut their new fixed investment spending. This in turn can lead to an NBER recession (an actual sustained fall of real GDP) to follow. This might be called a prelude employment recession (though it would be helpful if someone could suggest a better name).
Major causes of prelude recessions include a private-sector slowdown (as in classic stories of business cycle) and efforts by the Federal Reserve or other policymakers to attain a “soft landing.” (This refers to an effort to engineer a gradual reduction of real GDP growth and slow the fall of unemployment rates (or even raised them) in order to keep inflation from getting worse.)
A prelude recession might also happen due to the government’s budget sequester and the current partisan-driven “shutdown.” Both reduce government spending and hiring, which can reverberate through the economy causing the real GDP growth to slow. This process might snowball as both consumers and businesses cut spending, again reducing the availability of jobs and income. Thus an NBER recession can result. It's also possible that all we're going to have is a growth recession, but that's not what the doctor ordered when we still haven't recovered from the Great Recession.
The Measures. With these three kinds of non-NBER recessions in mind, I measured a “recession” as involving two or more back-to-back quarters of rising unemployment rates. These may be called “employment recessions” since employment recedes as unemployment rises. I use the unemployment rate, since talking about thousands or millions of unemployed workers misses the fact that the labor force (those both willing and able to work for pay) steadily increases over time. I use quarters (rather than months or years) in order to parallel the journalist’s version of the NBER definition of a recession. Just as with an NBER downturn or a Household Income Recession, I omit the period of stagnation that occurs in the aftermath of a recession. However, note that Household Income Recessions typically last longer than Employment Recessions.
The Bureau of Labor Statistics produces several other measures of “labor market slack,” but here I’m going to use what econopundits think of as the “official” unemployment rate (U3). This is partly due to the fact that the BLS didn’t start reporting other measures until relatively recently. It’s also the number that receives the most attention in the press even though it leaves out problems such as involuntary part-time workers, people who are driven out of job-seeking by bad prospects, and long-term unemployment. I doubt that using other measures will change my results, but we shall see. (Being fundamentally lazy, I’ll let someone else do this work.)
In any event, I doubt that there is a “correct” gauge of the starts and stops of recessions. If anything, I’d prefer the Household Income Recession measure of my previous blog. But it’s time to get to the results. But the point is not to present a total alternative to the NBER’s recession as much as to look at the economy from a different perspective.
I used quarterly data from 1948 to the present as provided by the BLS and massaged by the Federal Reserve Bank of St. Louis, to get quarterly numbers. I also got the NBER dates from the St. Louis Fed. First, we see three recessions that the NBER missed completely. They are growth recessions, since unemployment rose due to slowing real GDP growth without a full-scale GDP downturn happening. They occurred in 1951, 1959, and 1976. By sheer coincidence each of these occurred in the third and fourth quarters of the year (and yes the number were seasonally adjusted). Only the middle one (1959) really deserves serious attention, however, since the increases in the unemployment rate during the other two growth recessions were minor (i.e., one tenth of a percentage point). Of course, these growth-rate dips are “minor” only from an economist’s perspective. For those people in involved, the situation could easily been dire, since so many of us have a hard time doing well unless the economy is truly booming.
Next, we see the infamous jobless recoveries. They appear in the table below, using both my dates and those of the NBER, where “q” refers to the quarter of a year. Ignoring the growth recessions, all of the recessions I found except the second Volcker recession (1981q4-1982q4) ended after the trough quarter of the corresponding NBER recession. For Volcker #2, it’s cold comfort that unemployment stopped rising, since that one attained the highest unemployment rate the U.S. had seen since the Great Depression of the 1930s. Anyway, here’s my list, with the ways in which the two measures differ highlighted in boldface. The list includes the second Volcker recession as #8.
dates of cyclical peaks and following troughs
NBER Recession || Employment Recession
- 1949q1–1949q3 || 1949q1–1949q4
- 1953q3–1954q2 || 1953q3–1954q3
- 1957q4–1958q1 || 1957q2–1958q2
- 1960q2–1961q1 || 1960q2–1961q2
- 1970q1–1970q4 || 1970q1–1971q1
- 1974q1–1975q1 || 1974q1–1975q2
- 1980q1–1980q2 || 1979q3–1980q3
- 1981q4–1982q4 || 1981q4–1982q4
- 1990q3–1991q1 || 1990q3–1992q2
- 2001q2–2001q4 || 2001q1–2002q2
- 2008q1–2009q2 || 2007q3–2009q4
On the other hand, all of the employment recessions ended a quarter or more after the NBER recession ended. That is, the jobs situation (as measured by the official unemployment rate) continued to get worse even though the speed of the money flow through markets started rising. This joblessness was significantly worse during the 1990q3-1992q2 recession (#9), which ended fully five quarters after the NBER declared the recession over. It was this event which gave birth to the phrase “jobless recovery” while also helping to push President Bush #1 out of office (to be replaced by Clinton #1).
The lack of job creation after the NBER recovery began got worse, with recessions #10 and #11. The allegedly “mild” recession of 2001 (which I date as continuing all the way to 2002q2) ended two quarters after the NBER date. The same applies to the 2007q3-2009q4 “Great” one. Jobless recoveries seem to becoming the rule rather than the exception.
What about those prelude recessions? The first Volcker recession (#7) started two quarters earlier than in the NBER’s log. That is, the recession was much worse for working people than would be indicated by only looking at fluctuations of real GDP or NBER dates. The 2001 employment recession (#10) started one quarter “early” (compared to the NBER measure). I don’t know why this happened. Suffice it to say that the “Clinton boom” wasn’t as good as advertised.
Finally, the Great Recession (#11), which I date as being from 2007Q3 to the end of 2009, began one quarter earlier than the NBER measure. The fading job market was actually noted by the NBER committee that determines dates for business-cycle peaks and troughs, so that they stressed employment numbers much more than the usual real GDP measure in their dating. (They also dated the peak before the storm as during late 2007, but that’s lost when you use quarterly data.)
Conclusion. It's hard to draw a simple conclusion from these data. But two general conclusions are obvious. First, we shouldn't take NBER recessions as somehow reflecting the "gospel truth." The popular view that the "recession isn't over" actually says more than the NBER studies. Second, how we measure a peak month or quarter that begins a "recession" and the trough month or quarter that ends it depends on what our purposes are. The use of an unemployment measure, for example, illuminates the phenomenon of a "growth recession" (and similar) and the conflict between what's good for the market economy (measured by GDP) and what's good for working people (measured by employment rates).
– Jim Devine
NBER Recessions vs. Actual Recessions? (part 1 of 2)
It is not surprising that controversies surround the issue of whether an economic “recession” is over or not. This is especially true for a world-shattering episode like the Great Recession that started in late 2007 and ended in the middle of 2009. The dates I just quoted were determined by a committee of economists at the National Bureau of Economic Research. Contrary to what most textbooks say, however, such dates are subject to debate. So below I present another new gauge to indicate when economic recessions occur, on top of the one I discussed in an earlier blog post. The new one is based on the officially-measured unemployment rate (U3). But to set the stage for this, alas, I must first repeat some of what I already said in an earlier post. I promise to throw in a tiger analogy to make things more interesting.
There, I discussed a major contrast in perceptions: while the NBER, many economists, and most pundits declared the Great Recession “ended” as of July 2009, many or even most folks outside of this charmed circle say “the recession isn’t over!” Using a year-to-year fall in the inflation-corrected median household income as indicating the existence of a “recession,” it turns out that popular perception was almost completely correct. However, further examination of how the dates of recessions’ peaks and troughs are set suggests that more is going on. Even though many dislike the phrase, the idea of a "jobless recovery" actually makes some sense in terms of the normal workings of capitalism.
Definitional Differences. An important reason for the difference between the non-governmental NBER and those of us who have to live in the real-world economy is a lack of communication. First, econopundits define a “recession” as the situation where the economy is actually receding (or retreating) until it reaches the business-cycle "trough." Making things clearer, this kind of event is often called an economic downturn. Journalists often measure this as the situation when we see two or more back-to-back quarters when the inflation-corrected GDP fell. (This is also called the “real” GDP; I’m going to ignore the controversy about his practice and just go with the flow.) This is a simplistic, but easy-to-measure, version of the generally-accepted definition used by the NBER. In practice, it gives quarterly dates for peak and troughs that corresponds well to the NBER dates. Thus, I’m treating the journalistic definition as equivalent to an “NBER recession” – or a recession as defined in this “standard” way. (People should remember, however, that the NBER uses a more complex way to determine the dates of cyclical peaks and troughs. Otherwise they wouldn’t need a committee!)
In contrast, so-called “ordinary” folks, for whom the economy’s situation is up close and personal, often see a “recession” as including not only the period when the economy is falling but also the quarters or even years when it’s stagnating in the aftermath of an “official” NBER recession. We should be heartened by the fact that the economist Lawrence Ball’s Money and Banking textbook takes a similar tack: his recession adds what economists call a “recessionary gap” (i.e., real GDP hovering below its estimated potential) onto the back end of the falling real GDP conception.This fits with much of popular experience.
However, this debate is really nothing but a difference about definitions. To my mind, there’s no point in arguing about which definitions are “correct.” A fight over whether that big creature that’s about to stomp on us is a Brontosaurus or an Apatosaurus is totally sterile. And does it really matter whether we call a thumb a “finger” or not? But we should remember that this disagreement arises because people are speaking slightly different languages, based in their different life experiences and intellectual approaches.
Median Income Recessions. But there are more serious differences. As noted in the previous blog post on this subject, the economists and pundits are likely gauging a “recession” using the wrong numbers. For the vast majority of people, using inflation-corrected median household income is better than using real GDP (which is so central to the standard definition). Suppose that the Jones family represent the median household, i.e., one which is smack dab in the middle of the income distribution. If they find that their money income isn’t keeping up with inflation (so that their real income falls), that disrupts their efforts to make ends meet and may drive them to borrow to maintain their standard of living. That is, the Joneses must cut back, canceling visits to movie theaters, sit-down restaurants, and even doctor’s offices. This is exactly the kind of situation that the word “recession” evokes for most people.
In the previous blog post, I determined the dating of Household Income Recessions using yearly data, since that is what’s available. It’s possible that quarterly data would be better, but the analysis suggests that recessions are a much more serious problem than the econopundits have seen. A year-to-year recession of household incomes captures the severity that most associate with this word.
Using the median household income has the advantage of correcting the usual real GDP measures for the effects of population growth. In my post, I didn’t even mention this issue because it’s not very important in a rich country such as the United States.
A different way to deal with the population issue is to use per capita or mean income (that is, the total GDP divided by the total population). But using real median household income to gauge recessions is highly superior. Per capita incomes can soar even though the 99 percent find our lives continuing to be nasty and brutish (and short, if we can’t afford medical care). This happens if the rich are garnering income hand over fist and grabbing the lion’s share of any increase in total income. In fact, that’s exactly the situation we’ve seen in recent years: in the aftermath of the Great Recession, the rich have been getting richer while most of the rest of us have continued to suffer.
Thus, the Household Income Recession I found that corresponded to the NBER’s “Great Recession” ended in 2012 rather than in the July 2009. In fact, it may be continuing into 2013 or even later. Whether or not the Recession will continue can only be seen when the government cranks out the data (if they can find the money to do it).
Ride the Tiger! An important criticism of the use of market incomes to gauge the onset and end of a recession is that both GDP and household incomes, whether they are measured in “real” terms or not, totally ignore non-market costs and benefits. They thus mis-measure the net benefits produced by the economy. In GDP calculations, the cost of pollution – think of the megatons of oil the BP’s oil disaster dumped on the Gulf of Mexico a few years ago – is not deducted, unlike the market cost of (say) the gasoline that goes into making the GDP. In fact, the clean-up costs from a massive oil spill can add to the value of GDP since it involves hiring and paying droves of workers! Further, the benefits of non-market activities – such as parents taking care of their own children – are also forgotten in GDP calculations. Thus, some have developed alternatives, such as the Genuine Progress Indicator to get an idea of the net sustainable benefits actually created by our economy for people.
This criticism is totally on-target when we think about the quality of long-term economic growth (i.e., rises in the ability of the economy to produce). Are we building higher and higher GDP numbers by dumping costs on Nature? That may not be sustainable because they’ll come back to bite us in a few years. For example, GDP growth is promoted by dumping carbon dioxide into the atmosphere (rather than paying for it as a cost up-front). But the resulting rise in the sea level with likely create large economic costs very soon, if global warming isn't doing that already (as with all of the "weird weather" we've been having).
The problem is that this criticism isn’t relevant to the issue of business cycles (a shorter-term matter). Remember that we live in a capitalist economy. That means that the vast majority of people are dependent on getting jobs and being paid wages or salaries. This makes us dependent on the health of the capitalist market economy – by its own standards. Even rich folks are dependent on the health of capitalism since they reap dividends, interest, capital gains, and/or princely executive salaries and bonuses that the system pumps out. GDP, despite its limits, measures capitalist health. This means that it real GDP stagnates, not many jobs will be created and not much property income will be garnered. So many or most people will suffer.
Think of us as riding the back of the tiger called capitalism. Measures like GDP miss such events as when the tiger kills an antelope for no reason and lets the carcass rot. However, if we have no way to get off its back, we want the tiger to be well-nourished. After all, it might decide to eat its passengers. GDP is like a measure of the amount of food the tiger gets, as is the study of business cycles. If GDP is soaring, the passengers can enjoy the ride ... (I apologize if this analogy is unfair to tigers.)
(to be continued)
– Jim Devine
There, I discussed a major contrast in perceptions: while the NBER, many economists, and most pundits declared the Great Recession “ended” as of July 2009, many or even most folks outside of this charmed circle say “the recession isn’t over!” Using a year-to-year fall in the inflation-corrected median household income as indicating the existence of a “recession,” it turns out that popular perception was almost completely correct. However, further examination of how the dates of recessions’ peaks and troughs are set suggests that more is going on. Even though many dislike the phrase, the idea of a "jobless recovery" actually makes some sense in terms of the normal workings of capitalism.
Definitional Differences. An important reason for the difference between the non-governmental NBER and those of us who have to live in the real-world economy is a lack of communication. First, econopundits define a “recession” as the situation where the economy is actually receding (or retreating) until it reaches the business-cycle "trough." Making things clearer, this kind of event is often called an economic downturn. Journalists often measure this as the situation when we see two or more back-to-back quarters when the inflation-corrected GDP fell. (This is also called the “real” GDP; I’m going to ignore the controversy about his practice and just go with the flow.) This is a simplistic, but easy-to-measure, version of the generally-accepted definition used by the NBER. In practice, it gives quarterly dates for peak and troughs that corresponds well to the NBER dates. Thus, I’m treating the journalistic definition as equivalent to an “NBER recession” – or a recession as defined in this “standard” way. (People should remember, however, that the NBER uses a more complex way to determine the dates of cyclical peaks and troughs. Otherwise they wouldn’t need a committee!)
In contrast, so-called “ordinary” folks, for whom the economy’s situation is up close and personal, often see a “recession” as including not only the period when the economy is falling but also the quarters or even years when it’s stagnating in the aftermath of an “official” NBER recession. We should be heartened by the fact that the economist Lawrence Ball’s Money and Banking textbook takes a similar tack: his recession adds what economists call a “recessionary gap” (i.e., real GDP hovering below its estimated potential) onto the back end of the falling real GDP conception.This fits with much of popular experience.
However, this debate is really nothing but a difference about definitions. To my mind, there’s no point in arguing about which definitions are “correct.” A fight over whether that big creature that’s about to stomp on us is a Brontosaurus or an Apatosaurus is totally sterile. And does it really matter whether we call a thumb a “finger” or not? But we should remember that this disagreement arises because people are speaking slightly different languages, based in their different life experiences and intellectual approaches.
Median Income Recessions. But there are more serious differences. As noted in the previous blog post on this subject, the economists and pundits are likely gauging a “recession” using the wrong numbers. For the vast majority of people, using inflation-corrected median household income is better than using real GDP (which is so central to the standard definition). Suppose that the Jones family represent the median household, i.e., one which is smack dab in the middle of the income distribution. If they find that their money income isn’t keeping up with inflation (so that their real income falls), that disrupts their efforts to make ends meet and may drive them to borrow to maintain their standard of living. That is, the Joneses must cut back, canceling visits to movie theaters, sit-down restaurants, and even doctor’s offices. This is exactly the kind of situation that the word “recession” evokes for most people.
In the previous blog post, I determined the dating of Household Income Recessions using yearly data, since that is what’s available. It’s possible that quarterly data would be better, but the analysis suggests that recessions are a much more serious problem than the econopundits have seen. A year-to-year recession of household incomes captures the severity that most associate with this word.
Using the median household income has the advantage of correcting the usual real GDP measures for the effects of population growth. In my post, I didn’t even mention this issue because it’s not very important in a rich country such as the United States.
A different way to deal with the population issue is to use per capita or mean income (that is, the total GDP divided by the total population). But using real median household income to gauge recessions is highly superior. Per capita incomes can soar even though the 99 percent find our lives continuing to be nasty and brutish (and short, if we can’t afford medical care). This happens if the rich are garnering income hand over fist and grabbing the lion’s share of any increase in total income. In fact, that’s exactly the situation we’ve seen in recent years: in the aftermath of the Great Recession, the rich have been getting richer while most of the rest of us have continued to suffer.
Thus, the Household Income Recession I found that corresponded to the NBER’s “Great Recession” ended in 2012 rather than in the July 2009. In fact, it may be continuing into 2013 or even later. Whether or not the Recession will continue can only be seen when the government cranks out the data (if they can find the money to do it).
Ride the Tiger! An important criticism of the use of market incomes to gauge the onset and end of a recession is that both GDP and household incomes, whether they are measured in “real” terms or not, totally ignore non-market costs and benefits. They thus mis-measure the net benefits produced by the economy. In GDP calculations, the cost of pollution – think of the megatons of oil the BP’s oil disaster dumped on the Gulf of Mexico a few years ago – is not deducted, unlike the market cost of (say) the gasoline that goes into making the GDP. In fact, the clean-up costs from a massive oil spill can add to the value of GDP since it involves hiring and paying droves of workers! Further, the benefits of non-market activities – such as parents taking care of their own children – are also forgotten in GDP calculations. Thus, some have developed alternatives, such as the Genuine Progress Indicator to get an idea of the net sustainable benefits actually created by our economy for people.
This criticism is totally on-target when we think about the quality of long-term economic growth (i.e., rises in the ability of the economy to produce). Are we building higher and higher GDP numbers by dumping costs on Nature? That may not be sustainable because they’ll come back to bite us in a few years. For example, GDP growth is promoted by dumping carbon dioxide into the atmosphere (rather than paying for it as a cost up-front). But the resulting rise in the sea level with likely create large economic costs very soon, if global warming isn't doing that already (as with all of the "weird weather" we've been having).
The problem is that this criticism isn’t relevant to the issue of business cycles (a shorter-term matter). Remember that we live in a capitalist economy. That means that the vast majority of people are dependent on getting jobs and being paid wages or salaries. This makes us dependent on the health of the capitalist market economy – by its own standards. Even rich folks are dependent on the health of capitalism since they reap dividends, interest, capital gains, and/or princely executive salaries and bonuses that the system pumps out. GDP, despite its limits, measures capitalist health. This means that it real GDP stagnates, not many jobs will be created and not much property income will be garnered. So many or most people will suffer.
Think of us as riding the back of the tiger called capitalism. Measures like GDP miss such events as when the tiger kills an antelope for no reason and lets the carcass rot. However, if we have no way to get off its back, we want the tiger to be well-nourished. After all, it might decide to eat its passengers. GDP is like a measure of the amount of food the tiger gets, as is the study of business cycles. If GDP is soaring, the passengers can enjoy the ride ... (I apologize if this analogy is unfair to tigers.)
(to be continued)
– Jim Devine
Congressional Staff Compensation Packages Explained in a Way that Even Sean Hannity Might Get
I stopped listening to Sean Hannity years ago as watching his show is bad for both the brain cells and blood pressure so I have to thank Catherine Thompson for letting us know about this silly exchange:
A discussion between Fox News host Sean Hannity and Reps. Bill Pascrell (D-NJ) and Matt Salmon (R-AZ) on employer contributions to congressional staff's health care plans quickly devolved into a shouting match Thursday ... "You have a 72 percent subsidy that everybody watching this show does not have. That's what the law says congressman," Hannity said. "You’re getting special perks and special breaks for yourself, absolutely. So cut the crap and stop lying to the audience!”I work for the private sector and my employer pays for part of my health insurance, but then again I just admitted that I was not watching this show. But let’s consider two possible ways of compensating the staff members of Congressman. Suppose Pascrell’s staff was paid $40,000 a year and got a health insurance package where the employee paid $50 a month and the government kicked in $150 a month. Sean Hannity would call that a 75% subsidy I guess. Suppose Congressman Salmon’s staff was not offered this subsidy but received $42,000 a year in terms of their Congressional subsidy. They then went onto a health exchange and got essentially the same insurance for $200 a month. Congressman Salmon’s staff would be getting an extra $200 a year precisely because the Federal government would be paying out an extra $200 a year per person. Which is just to say this has become one of the many stupid discussions in D.C. these days – for which we have Senator Grassley to blame.
Thursday, October 3, 2013
The Mulligan Marginal Tax Rate
Casey Mulligan has published a truly amazing chart in his latest Wall Street Journal op-ed asserting the following:
The chart nearby shows an index of marginal tax rates for non-elderly household heads and spouses with median earnings potential. The index, a population-weighted average over various ages, occupations, employment decisions (full-time, part-time, multiple jobs, etc.) and family sizes, reflects the extra taxes paid and government benefits forgone as a consequence of working. The 2009-10 peak for marginal tax rates comes from various provisions of the "stimulus" programs in the American Recovery and Reinvestment Act of 2009 and the extension of unemployment benefits to 99 weeks in some states. At the end of 2012, the marginal tax rate index reached its lowest value since 2008: 43.9%. A little over a year later (January 2014), the index will be close to 50%, driven up by the expiration of the payroll tax cut and multiple provisions of the Affordable Care Act.I have to admit that I have yet to read his NBER paper from which his graph is supposedly taken, but something in all of this looks mighty odd to me. The graph starts in the good old Bush43 days before the Great Recession. I realize that the “1 percent” paid marginal tax rates close to 36% on their Federal income taxes and perhaps a bit extra depending on what state they lived in. But these same folks had a zero marginal tax rate from payroll taxes. Yet, the payroll tax holiday and its expiration change the Mulligan marginal tax rate calculation dramatically. OK, there are a lot of households that were affected by the payroll tax holiday and its expiration even at the margin, but their marginal income tax rate was never anywhere close to 36%. So one has to wonder how few households face anything remotely close to the marginal rates presented in this graph. Given its pro-Republican spin value, Greg Mankiw dutifully linked to it under The Coming Tax Hike supposedly from “The-Not-So-Affordable Care Act” but provided absolutely no commentary or insights. I guess you’ve guessed by now that I’m not buying this Mulligan but it also seems I should go read his NBER paper. Any insights from other economists on whether this chart makes any sense or not would be greatly appreciated.
Wednesday, October 2, 2013
Public Health Externalities Argument For Universal Health Insurance Coverage
As coauthor of a widely used comparative systems textbook (third edition now in preparation for MIT Press) who travels around a lot and talks to economists and policymakers in many nations, I have been struck by a nearly universal argument that has been made to me repeatedly, often with dripping contempt for the discourse in the US, an argument that they consider to be obvious and a matter of common sense as well as good economics, but that one almost never hears within the US. This is that the presence of negative externalities from having sick people walking around justifies making sure that everybody has health insurance, however one mananages to pay for it or organize it, so that people will get preventive care from physicians and not be wandering around infecting those around them. With the US being the only high income nation that does not have universal coverage, I do not know to what extent our poor showing on life expectancy (37th to 50th depending on source and how many micro states one includes on the list) is due to our failing to cover everybody and avoid this obvious negative externatlity, but I have no doubt it aggravates this poor performance.
Of course, the joke is that the new ACA (aka "Obamacare," even though it was initially a GOP-supported plan out of the Heritage Foundation implemented in MA by Romney) does not provide universal coverage, although it increases coverage. The SCOTUS in an unprecedented and supremely stupid move dramatically reduced this expansion of coverage by allowing states to opt out of the Medicaid expansion in the law, with that the leading source of the hoped-for expansion of coverage, now limited, and with the states with the highest percentages of uninsured (25% in TX) being the ones with governors or legistlatures or both blocking adoption of the Medicaid expansion. I guess we should understand that at least one reason we do not hear this argument universally used in other nations is that ACA does not mandate universal coverage, although clearly the argument can be used to support the expanded coverage under ACA. Unfortunately, I think the subtext of opposition to universal coverage is just plain raw racism, people not wanting "them," the moochers of racial minority status, to get coverage, especially those illegal immigrants who should be encouraged to leave the country and certainly should not be given any coverage, even if them getting sick puts all of the rest of us at greater risk of doing so as well.
Barkley Rosser
Of course, the joke is that the new ACA (aka "Obamacare," even though it was initially a GOP-supported plan out of the Heritage Foundation implemented in MA by Romney) does not provide universal coverage, although it increases coverage. The SCOTUS in an unprecedented and supremely stupid move dramatically reduced this expansion of coverage by allowing states to opt out of the Medicaid expansion in the law, with that the leading source of the hoped-for expansion of coverage, now limited, and with the states with the highest percentages of uninsured (25% in TX) being the ones with governors or legistlatures or both blocking adoption of the Medicaid expansion. I guess we should understand that at least one reason we do not hear this argument universally used in other nations is that ACA does not mandate universal coverage, although clearly the argument can be used to support the expanded coverage under ACA. Unfortunately, I think the subtext of opposition to universal coverage is just plain raw racism, people not wanting "them," the moochers of racial minority status, to get coverage, especially those illegal immigrants who should be encouraged to leave the country and certainly should not be given any coverage, even if them getting sick puts all of the rest of us at greater risk of doing so as well.
Barkley Rosser
Tuesday, October 1, 2013
George Will’s Reasoning to Repeal the Medical Device Tax
I guess I’m a bit late to the party as George Will penned this back in May of 2012:
In 2010, however, Congress, ravenous for revenue to fund Obamacare, included in the legislation a 2.3 percent tax on gross revenue — which generally amounts to about a 15 percent tax on most manufacturers’ profits — from U.S. sales of medical devices beginning in 2013. This will be piled on top of the 35 percent federal corporate tax, and state and local taxes ... Covidien, now based in Ireland, has cited the tax in explaining 200 layoffs and a decision to move some production to Costa Rica and Mexico.Where to begin with this op-ed? First of all - Covidien denied that is decision to source some of its products from overseas were due to this tax. Of course, this did not stop the rightwing spin machine from repeating Will’s claim. Maybe other medical device manufacturers made this claim but Paul N. Van de Water has often noted:
the excise tax creates no incentive whatever for medical device manufacturers to move production overseas. The tax applies to imported as well as domestically produced devices. Thus, sales of medical devices in the United States will be equally subject to the tax whether they are produced here or abroad, and the tax will not make imported devices any more attractive to domestic purchasers. In addition, devices produced in the United States for export are exempt from the tax, so it will not reduce the competitiveness of U.S.-made devices in international markets.Yes – I am repeating myself but as I also noted on Sunday, the tax is on the wholesale price and not gross revenues as Will claimed. Here are a few other things Will seems to not understand. Covidien’s effective tax rate is 15% - not the 35% Federal plus state & local taxes Mr. Will talks about. Maybe he is thinking more along the lines of Medtronic. So I checked its 10-K filing for fiscal year ended April 26, 2013. Its pretax income was 25.6% of its sales, which means this tax would be far less than the alleged “15 percent tax” Mr. Will suggests. And its effective tax rate was only 18.4%, which is about half of what Mr. Will claims.
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